Over the last several years, the U.S. housing market has steadily climbed out of its long slump to largely return to pre-recession levels. Home prices continue to rise as more buyers enter the market, while interest rates remain relatively low despite recent increases. For those reasons, it’s the perfect time to make a deal for both buyers and sellers.
But why are a higher number of real estate transactions failing?
Real estate information site Trulia released a report last month that shows the rate of failed home purchases throughout the 100 largest metro areas in the U.S. nearly doubled between 2015 and 2016 – rising from 2.1 percent of failed transactions to 3.9 percent last year.
Failed transactions can have any number of causes: The bank may find issue with the buyer’s financial history, the home may not appraise for the agreed-upon sale price or the home inspection may reveal underlying issues the buyer isn’t willing or able to take on.
Market conditions can exasperate the frequency of issues that may pop up during the negotiation, due diligence or escrow periods of a home sale. And despite the fact that they signal positive growth in home prices and sales, the following existing market trends can also make it more likely for you to hit a bump in the road.
More first-time homebuyers house-hunting. Long kept from purchasing during the housing crisis that began nearly a decade ago, first-time homebuyers have been entering the market at an increasing rate. Thirty-five percent of home purchases in 2016 were made by first-time homebuyers, compared to 32 percent in 2015, according to Trulia.
A group that often includes the youngest buyers and those with the shortest financial histories, first-time homebuyers are also more likely to be part of a failed transaction. The Trulia report reveals starter homes – defined as those in the bottom third of a market’s price range – are more likely to endure a failed deal, with an average failure rate of 6.3 percent among the country’s 100 largest metro areas.
With the number of first-time buyers expected to increase as more millennials enter the market this year, this could lead to even more failed sales, says Felipe Chacon, housing data analyst for Trulia.
“If starter and trade-up homes start to make up the larger share of listings … I would also expect that to start to bump up the fail rates, just because a larger share of homes on the market are not eligible for first-time homebuyers to buy [right now],” Chacon says.
Price inflation due to low inventory. New housing construction essentially ground to a halt during the recession, and real estate development has been struggling to meet demand since. The new homes being built largely cater to higher-end and luxury buyers, adding to the lack of available homes at the lower end of the market.
“A lot of the places that have the highest fail rates have been also among the fastest declining inventories,” Chacon says. Ventura, California, is reported by Trulia to have the highest sale failure rate at 11.6 percent. Among the top 10 are other metro areas notorious for competitive, tight housing markets, such as San Jose, California, and Portland, Oregon, both with more than 9 percent of transactions failed in 2016.
A competitively priced home could easily lure buyers into a bidding war, edging the price up above what an appraiser would consider market value for the home. And when that happens, it’s likely that a lender will have a problem approving a mortgage because the price is considered inflated.
“If you’re in a really hot market, the buyer should almost expect that to happen,” says John Myers, owner and qualifying broker of Myers & Myers Real Estate Inc. in Albuquerque, New Mexico.
While the result of an appraisal can mean you won’t get your desired mortgage, it also doesn’t have to ruin the deal. Elizabeth Weintraub, broker associate at Lyon Real Estate in Sacramento, California, stresses that the appraised value is based on how the individual appraiser measures the home’s value compared to similar homes, which is fairly subjective. Different appraisals based on the type of mortgage – FHA versus conventional, for example – can yield different results.
“Appraisers are human beings – they make mistakes, they screw up. You can have three different appraisers, and you’ll have three different appraisal values,” Weintraub says.
How to Keep Market Trends From Derailing Your Deal
Especially if you’re a first-time homebuyer, it’s important to put yourself in the best position to successfully purchase a home – from getting your financial information organized far in advance to knowing what to expect when you begin the bidding and negotiation process. Here are three things you can do to avoid being part of a failed sale:
Know your budget. Almost any real estate agent you work with will want you to be preapproved for a mortgage before you start touring homes – and for good reason. If you’ve been preapproved for a mortgage, you should have examined your financial situation and have a sense of what you can afford monthly. You need to have a realistic understanding of your budget, and you’ll want to shop below that approval level to leave room for counter offers or unexpected changes to your financial situation before closing.
Consider a newer home or plan for renovations. Homes built in 2016 had the lowest rate of failed sales at 2.6 percent nationally, according to the Trulia report. Chacon notes those new homes are not only more likely to sell to higher-end buyers, but they’ve also had to pass current permit checks, which makes them more likely to clear a home inspection without problems.
If a new home is outside your price range, shop for older homes while keeping the need for repairs or renovations in mind. “Don’t let bad news in an inspection derail you – just plan for it,” Chacon says.
Manage your expectations. In a market with few homes and an ever-increasing number of buyers, it’s easy to get caught up in the home buying frenzy. It’s important to keep a level head and avoid offering a price outside your budget or bidding on a home you don’t really want because it’s the only one out there.
In these cases, Myers says it’s helpful to work with a real estate agent who has in-depth knowledge of the local market and can tell you which obstacles you’re more likely to face based on current conditions and your budget.
“I want to make sure that I provide expectations about a transaction for my client so they understand where deals fall apart,” Myers says.